I think it is stupid to get a 50-year mortgage—an idea President Trump floated earlier this week—or an 8-year car loan. The shorter the loan term, the better. Ask me how I know…
More than 20 years ago, I landed a senior position where I was paid more money than I had ever earned before (or since). The job came with a full relocation package, and my employer paid the points on my mortgage. I took advantage of my newly flush state and got a 15-year fixed-rate mortgage.
Less than three years later, it was clear the company that had hired me was going through some financial difficulties as products failed in the market. Being an insider, I saw the writing on the wall and refinanced my mortgage to a 30-year fixed rate, which lowered my monthly payment by $1,000. Sure enough, 90 people were laid off three months later, our manufacturing plant was sold, and the company folded within a year. I was unemployed for nine months.
Having a lower mortgage payment was a big help while living on savings plus a $300-per-week unemployment benefit. In time, I landed back on my feet, although not at the same high-flying level. As a result, I never went back to a 15-year mortgage. I refinanced my house as rates dropped, but always stuck with the 30-year mortgage because of its lower monthly cost. As a result, I never owned the house outright. I also paid far more over the life of than loan than I would have if I had stayed at a 15-year term.
The Math Tells the Tale
Here is an example of the true cost of a mortgage for 15, 30 and 50 years. Let’s assume you buy a $500,000 home and put 20 percent down. This leaves you with a $400,000 mortgage. Look at the payments below, noting that these do not include property tax or insurance, which could add $500 to $1,000 a month depending on where the house is located:
| Rate | 6% | 6% | 6% |
| Term | 15 years | 30 years | 50 years |
| Monthly Payment | $3,375 | $2,398 | $2,105 |
| Total interest paid | $207,577 | $463,353 | $863,372 |
| Total of all payments | $607,577 | $863,653 | $1,263,372 |
As you can see, if the interest rate is the same across all three terms, buying a home over 50 years will save you less than $300 a month but cost you an additional $400,000 before you pay off the house. That’s a terrible trade-off.
If your finances are such that you need to pay $300 less per month, you would be better off saving until you could put down $150,000 instead of a $100,000 down payment. At the 30-year rate, this would reduce your monthly payment to $2,098.43. Your total payments over 30 years would also be $108,000 less. Spend $50,000 to save $400,000? Yeah, that’s a good deal.
More Problems
Another problem with a 50-year mortgage is you will also still have a mortgage payment after you retire. With a 30-year rate, you might be able to pay off your home before you retire, which will make your retirement much more affordable. A 50-year loan is a multi-generational loan you will have to pass on to your kids. That’s what they did in Japan when it offered 100-year mortgages.
The math is similar for buying a car over 48 or 60 months instead of 84 or 96. You will pay a little more per month for a shorter-term loan, but far less over the life of the loan. You are also unlikely to end up owing more than the car is worth if you decide to trade it in four years down the road.
Adjustable-Rate Mortgages (ARMs) are a Trap
Adjustable-rate mortgages are something else to avoid. They are designed to give you an artificially low payment for the first few years of your loan. They do this by adjusting the rate after three, five or seven years, and then annually thereafter. If the rate on a 30-year fixed mortgage is 6 percent, you might get a 3/1 ARM with an initial interest rate of just 4 percent. Using the figures from the table above, your mortgage payment (without insurance and property tax) would be $1,909, a savings of $500 over a fixed-rate mortgage. The lower payment allows you to qualify for a house that you might not otherwise be able to afford.
But in three years, your rate will “adjust” upwards. (They almost always adjust upwards because there is no such thing as a free lunch.) Suddenly, your rate is 6 percent, and you have to come up with that extra $500 a month. Worse yet, the following year it could go up to 8 percent, meaning you are paying $1,000 a month more than your initial rate. Now you are over your head, living in a house you can no longer afford. Add in a recession or a job loss, and you’ll end up in foreclosure. You’ll lose your home and your down payment and be lucky if you can find rental half the size of your house.
The big lesson is, if you can’t afford the house, don’t buy it. Keep renting. Traditional fixed-rate mortgages are “traditional” for a good reason. They make the most financial sense.
Debt May Be a Necessary Evil
All debt is bad (or as Dave Ramsey says, debt is dumb) but some debts are worse than others. Any loan with an adjustable rate is in the “worse” category. This includes HELOCs and business lines of credit. They can drive you bankrupt when rates rise. Payday loans, pawn shop loans, and other high-interest loans are also bad.
If you are a sub-prime borrower with bad credit and have to pay extra-high interest rates, then just stop borrowing. There is no future in it; as the government is proving, you cannot borrow your way out of debt. Go without and live on less. Going cold turkey is a struggle, but it will make you stronger int he long run. Pay off your bills and start fresh. If you can’t, then talk to a lawyer about bankruptcy. Don’t declare bankruptcy unless you can change how you live and your spending habits. If you can’t do that, bankruptcy will do you no good.
In our society, there are times when you may need to borrow money, and buying a house is one of them. What you should avoid doing is borrowing money to buy consumables—like groceries or dinner out. Using the buy-now-pay-later feature so many stores offer is another trap.
It is far better to defer your borrowing until you have saved enough to pay cash. Imagine being able to buy a house or a car outright. Granted, this is difficult, but it becomes easier if you lower your standards. A used car purchased for $12,000 is much easier to afford than a new car that costs $32,000 or, God forbid, $52,000, which is about the average price of anew car.
Watch Out for Credit Card Debt
I know someone who recently got a department store credit card so they could save 20 percent at checkout. The interest rate on the card was 32 percent. That will eat up the 20 percent savings unless you pay off your bill immediately. So, pay it off and cut up the card.
I understand you may need a credit card for emergency expenses, but going out to dinner is not an emergency. Neither is taking a vacation you can’t afford. Be the customer credit card companies hate because you pay off your bill every time. Use the cards for convenience. Get all the points you can, but live within your budget and never get into the position where you have to pay interest unless it is a life-or-death situation.
Food, water and shelter may be the Big Three in prepping, but you need to be financially prepared as well as physically prepared. The way to do that is to carry little or no debt, buy only what you can afford, and to disregard what other people say or do. Don’t try to keep up with the Joneses; they are probably drowning in debt. Instead, try to keep your head above water.
Disclaimer
This post is not financial advice. I am not a financial advisor, accountant, economist, real estate expert, tax professional, or lawyer. I am simply a well-educated prepper relaying my personal beliefs established over more than 30 years of prepping. Do your own research and consider consulting a financial professional to assist you with your financial decisions.
